INTRODUCTION TO ENVIRONMENTAL VALUATION AND COST BENEFIT ANALYSIS

INTRODUCTION TO ENVIRONMENTAL VALUATION AND COST BENEFIT ANALYSIS

By

Mustapha Muktar, PhD

Department of Economics

Bayero University, Kano-Nigeria

mmukhtar.eco@buk.edu.ng and muktaronline@gmail.com

http//:www.mustaphamuktar.blogspot.com

Introduction

Cost Benefit Analysis (CBA) is a procedure for comparing alternative possible causes of action with reference to the net benefits that they are likely to produce. Net benefit refers to the differences between benefits and costs. The costs and benefits are measured in money terms. CBA is aimed at finding out whether the welfare of a society would rise or fall as a result of contemplated project. Cost-Benefit Analysis is an important tool of environmental decision making in environmental management.

 

After the necessary valuation, the costs and benefits are compared using profitability indicators of benefit cost ratio (BCR) and Net present value technique (NPV), algebrically;

BCR=∑Bt,          NPV= ∑Bt-∑ct   

                ∑Ct                      (1+r)ⁿ

 

decision is taken thereof. A project is a viable if BCR is greater than one or if it has a positive NPV, however for choice among mutually exclusive projects, we chose one with  the highest BCR or NPV, if the BCR=1 or NPV=0, then the cost of project is exactly equals to the benefit.

 

 

 

Environmental Cost-Benefit Analysis

The objective of every project is to increase welfare of the beneficiaries, any project or investment which does not have the prospect of improving the socio-economic well being of the majority of population is irrational. governments therefore face resource allocation decisions guided by CBA. One unique feature of environmental CBA is how the changes associated with environmental assests are valued.

 

Valuing Environmental Changes

Valuation can simply be defined “as an attempt to put monetary values or to environmental goods and services or natural resources”. It is a key exercise in economic analysis and its results provide important information about values of environmental goods and services. This information can be used to influence decisions about wise use and conservation of forests and other ecosystems. The basic aim of valuation is to determine people’s preferences by gauging how much they are willing to pay (WTP) for given benefits or certain environmental attributes e.g. keep a forest ecosystem intact. In other words, valuation also tries to gauge how much worse off they would consider themselves to be as a result of changes in the state of the environment such as degradation of a forest.

 

Economic valuation never refers to a stock, but only the change in a stock. If one speaks of the economic value of biodiversity, then one always means the economic value of a change of biodiversity. It is not a question of determining the ‘true’ value of biodiversity or ecosystems but valuing changes and comparing them with their alternatives, e.g. with a golf course vs without a golf course. Thus is meaningless here to for example, ask “how much are the African National Parks worth?”. A reasonable question in this case would be: ‘If governments have proposed a new policy to prevent the huge losses of wildlife species from African National Parks. What is the monetary value of the benefits of this policy (i.e., the economic damages avoided)? Economists thus stress that the valuation should focus on changes rather than levels of biodiversity or ecosystem.

 

The policy relevance of valuation information is extensive, but might include:

• demonstrating the value of biodiversity: awareness rising;

• land use decisions: for conservation or other uses;

• setting priorities for biodiversity conservation (within a limited budget);

• limiting biodiversity invasions;

• assessing biodiversity impacts of non-biodiversity investments;

• determining damages for loss of biodiversity: liability regimes;

• limiting or banning trade in endangered species;

• revising the national economic accounts and

• choosing economic instruments for saving biodiversity (e.g. taxes, subsidies) etc.

 

Valuation has an important role to play in environmental planning and management activities because it helps to answer many questions including the following about any given natural resource:

• What is the value of conserving a certain natural resource (e.g. forest)?

• To whom does the value accrue?

• How does degradation and loss of the natural resource lead to costs to different segments of society?

• Who gains and who loses when a natural resource is conserved or degraded?

• How can natural resource conservation be efficiently and equitably financed?

• How can people be motivated to take into account natural resource benefits and costs of its loss in the course of their economic activities?

• How can policy, planning and decision making with regard to natural resources be better influenced?

 

Some Basic Valuation Tecnniques

The Stated Preference Methods (SP)

This is an umbrella term used to explain various methods. The most widely applied SP is the contingent valuation (CV) method. Using an appropriately designed questionnaire were environmental assets will serve as a good in question to be traded. Example of traded assests are; human health, water sources to be financed, parks to be build or land to be mined. The CV define the good, then the institutional context to which it should be provided and the way it would be financed. Respondents are then asked to express their maximum willingness to pay (WTP) or minimum willingness to accept compensation (WTA) for a hypothetical change in the level of provision of good or service. This method is used to assess all benefits associated with a change in the level of provision of goods or services. This method has been applied in both developed and developing countries to address, water quality, outdoor recreation, species preservation, forest protection, air quality, visibility, waste management, health, natural resource damage etc.

 

Other less frequent method under the SP methods includes choice-modeling based on choice experiment (CE). In (CE) survey respondents are required to choose their most preffered out of a set of alternative policy options, for example in case of improving the quality of water such as river, the attributes might be boost the rivers ecology (indicated by fewer fish death), decrease health risk to those who are exposed to water (swimmers and rowers etc). CE is applied where changes are multi-dimensional and where trade-offs between these dimensions are of particular interest.

 

Revealed Preference Methods (RP)

This looks at the “second market” that is it analyses or make information for non-market goods as implied by past behavior in associated market.

RP is based on central behavior and hence enjoy higher credibility, for example if a person pay N200 for disposal of his waste/refuse, then that is where his preference is revealed. But one of its limitations is its inability to estimate non use values, as it is based on market footprints of some form of user related behavior. The two main RP techniques are Travel Cost method and hedonic pricing method.

 

Travel Cost Method (TC) has been used to value spartial non market goods, particularly outdoor locations (parks, wood land, beaches etc). Individuals produce recreational experiences through a number of factors which in some way attract prices, the factors are for example, and recreational areas, travel to and fro, and staying overnight etc, the information about these factors are collected and carefully analyzed. From there the total utility is estimated and compared with the total cost; this is however being estimated using econometric techniques.

 

The Hedonic Pricing Method (HP)- the starting point here is that price of most goods is function of a number of characteristics. For example, price of a house is likely to reflect, safety, sanitation facilities, access to roads, utilities etc. The HP method is sometimes used to estimate the value of avoiding risk, death or injury by looking for price differentiates between two alternatives with different exposures to risk. It is used to identify the value of non-market goods (or bads) affecting housing prices such as road traffic, air craft noise, and air pollution, water quality, planning restrictions to open spaces in and around the urban areas etc. This technique depends on collection of large sample of data on prices and characteristics of properties in an area and applying econometric as well as statistical techniques to estimate the hedonic price functions, relating to each characteristics of interest to the house price.

 

Combining SP and RP however is most appropriate as they are found to be complementary to each other and can be used to jointly estimate preference and that can be facilitated by using Geographical Information System (GIS), which provide geo-coded data especially in the context of recreation demand researches and hedoure analysis.

SUMMARY OF BASIC TECNIQUES OF VALUATION

 

• Market Price Method: Estimates economic values for ecosystem products or services that are bought and sold in commercial markets

• Productivity Method (net factor method, derived value method, effect on production): Estimates economic values for ecosystem products or services that contribute to the production of commercially marketed goods

• Hedonic Pricing Method (HPM): Estimates economic values for ecosystem or environmental services that directly affect market prices of some other good. Most commonly applied to variations in housing prices that reflect the value of local environmental attributes.

• Travel Cost Method (TCM): Estimates economic values associated with ecosystems or sites that are used for recreation. Assumes that the value of a site is reflected in how much people are willing to pay to travel to visit the site.

• Damage cost Avoided, Replacement Cost, Substitute Cost Method, Avertive behavior: Estimate economic values based on costs of avoided damages resulting from lost ecosystem services, costs of replacing  ecosystem services, or costs of providing substitute services

• Contingent Valuation Method (CVM): Estimates economic values for virtually any ecosystem or environmental service. The most widely used method for estimating non-use, or “passive use” values. Asks people to directly state their willingness to pay for specific environmental services, based on a hypothetical scenario

• Contingent Choice Method (CM): Estimates economic values for virtually any ecosystem or environmental service. Based on asking people to make tradeoffs among sets of ecosystem or environmental services or characteristics. Does not directly ask for willingness to pay—this is inferred from tradeoffs that include cost as an attribute

• Benefit Transfer Method: Estimates economic values by transferring existing benefit estimates from studies already completed for another location or issue.

 

 

    

 

Environmental Economics Lecture Note

ENVIRONMENTAL ECONOMICS LECTURE NOTE

Mustapha Muktar, Ph.D

Department of Economics

Bayero University, Kano-Nigeria

mmukhtar.eco@buk.edu.ng and muktaronline@gmail.com

http//:www.mustaphamuktar.blogspot.com

 

NATURE AND SCOPE OF ENVIRONMENTAL ECONOMICS

Introduction

The environment become one of the major concerns to the present economy because of the activities of man. The relationship between man and environment have been changing along the development process from generation to generation. Economists are concerned with increasing demand of resourcess and its implication on the natural environment, therefore, a controversey on the limits to growth. The environment provides food shelter, clothing, medicine, raw materials and other resources.

Economics is concerned with making best allocation of resources among competing alternatives, it is concerned with utilization of resourcess to ensure an improvement in welfare. There is therefore, a strong link between the environment and economics, humanity are faced with alot of environmental problems which have economic dimensions.

Environmental Economics is that aspect of economics that deals with the interelationships between the environment and economic development, it studies   the ways by which a balance is striked between the two, it is also concerned with how the damage done can come to a halt or reversed.

Scope of Environmental Economics

1.   To strike a balance between economic growth and the environment

2.   Pollution control from economic point of view

3.   The nature of consumption and utilization of resources as they are being depleted, therefore optimal use with minimal level of wastage is needed

4.   Limits to growth as growth must be controlled through taxes and other fiscal measures to make it optimal

Relationship between Environment and the Economy

Since the environment provides resources for economic activities, all economies should therefore be concerned with the following basic objectives, they are;

1.   Effeciency in the utilization of resourcess

2.   Equity in terms of distribution of income and resourcess as well as compensations

3.   Stability, such that taxes, charges and other control measures should not be too high to discourage/reduce output

4.   Growth, all economies aim at sustainable economic growth

Man and Environment

The evolution and process of human civilization is a story of man in his struggles against nature man has to subject nature to satisfy his wants because he needs basic necessities of life and in his attemp to satisfy them, he not only conquers the immediate environment but jeopardizes the future of the next generation to come. This interrelationship is presented below;

 

Environmental Factors: Land, Climate, Vegetation, Menirals, Water, Atmosphere etc

Human Factors: Demography, Economy,  and Culture

Technology

 

Use of Natural Environment

The Environment Changes

Feedback and Alteration

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 From

From the figure above, one can see how the environment provides land, climate, forests, water bodies and other assets. Human factors inform of demography, culture and economy used technology to decide on how to use the assets provided by the environment and in so doing, the environment changes and the feedback is that it is altered from its natural formation.

ENVIRONMENTAL POLLUTION

Introduction

Pollution is the release by man of substances, chemicals and other products into the environment that adversely affects life and properties. It can also be a consequence of natural disaster. For example hurricanes often involve water contamination, oil spills or the release of hazardous materials into the environment. The substances that are released into the environment are term pollutants. Pollutants can cause disease including cancer, allergies, asthma and etc. pollution can take various forms depending on the nature of pollutants and the damage it caused to the environment. We can therefore identify pollution to include that of air, water, land and noise pollution. 

Economics of Pollution

Pollution developed from the concept of externalities. Pollutants results from a production or consumption process in which the conversion of inputs into outputs is not efficient in a physical sense, that is some of the inputs become waste products. Residuals from economic process enter into the environment and damage it. The extent of this damage however, depends on the absorptive capacity of the natural environment. Whenever the residuals outweigh the absorptive capacity of the environment then, pollution occurs.

Economic Activity and Environmental Pollution

Economic Activity

Emissions into the environment

Absorption into Harmless Form

Non Absorned Emissions

Accumulation of stock Pollutants

Damage to the Environment

   

 

 

 

Economists are concerned with the effects of pollution on welfare and are therefore interested in the damage done to the environment as a whole as such pollution can be defined as the net flows exceeding the absorptive capacity of the environment and which have damaging effects upon human welfare and the ecological system in general.

Pollution affects the magnitude and size of environmental resources example it affects the growth of plants, animals, as well as the quality of physical assets. It can also affect the quality of Air and water that exist in the environment.  

Efficient Level of Pollution

Identifying efficient level of pollution is very crucial in pollution abatement and control. Existing technology cannot produce goods and services without pollution and hence a tradeoff between production and pollution exists as undesirable ones (pollution) are created. Below summarises the argument.

Net benefits of pollution = Benefits of outputs associated with pollution       minus damages resulting from pollution   

Economic Instruments and Pollution Control

The following are some of the policy tools of controlling pollution:

-      Emission standards, this is a legal approach in which the authorities impose emission standards on each source in economics, this approach is referred to as “command-and-control approach.” An emission standard is a legal limit on the amount of pollutant an individual source is allowed to emit failure to abide attracts charges.

-      Transferable Emission Permits- Under this system all sources are required to have permits to emit. Each permit specifies how much a firm is allowed to emit and the permits are freely transferable and can be bought or sold and any source exceeding the permit will cause severe monetary sanctions.  

-      Product charges where it is not possible to monitor the level of emissions, then the commodity that is most directly responsible for pollution/emissions should be taxed. For example gasoline could be taxes rather than the emissions, also fertilizer is taxed rather than the contamination it did to the groundwater sources. The Irish have even tax plastic bags to prevent littering; one limitation of this is that products are taxes uniformly while they caused different level of emissions.

 

Irish Bag Policy In 2002 a tax of $15 per plastic bag was charged it brought about 95% reductions in bags and the revenue earned is used by Government to manage the environment. (see http//:www.Golby.edu/~thtieten/litter.html/.)

 

Agriculture and the Environment

Introduction

Agriculture is the science and art of tilling the soil and rearing of animals for the purposes of producing food for man and raw materials for industries, population growth and the need for foreign exchange have stimulated agricultural practices and development and hence this prompted environmental change. The impact of agricultural practices on the environment is dependent on the type of the natural environment (desert, rainforest, or mountain region).

Some of the negative effects of agriculture on environment are deforestation, soil erosion, salinization, bush burning and overgrazing.

Deforestation: is the removal of vegetation cover and its consequences manifests itself in several forms such as erosion, drought, firewood scarcity, sedimentation and micro-climatic damages, deforestation is caused by indiscriminate felling of trees and large scale extraction of wood for furniture as well as paper and pulp manufacturing. The developing world deforests 11.3 million hectres per year; some consequences of deforestation are species extinction, loss of fixed carbon and reduced capacity of water retention by soils.                   

Soil Erosion: This is a situation where by top soil are removed or lost from land surface it can be caused by bad agricultural practices such as bush burning, deforestation and overgrazing. Soil is removed and also where the sediments are deposited, soil erosion results to low productivity.  

Salinization: This is a form of environmental degradation associated with irrigation which leads to reduction in crop productivity. Salinization connotes an increase in the concentration of minerals due to inadequate drainage, and the groundwater becomes saline and water logged the area, the affected land therefore becomes unsuitable for production, since the present of salt and minerals in the roots of crops hinders their growth. Salinity also increased due to high water loss were evaporation is rapid.

Bush Burning: In developing world especially, fire is used to clear virgin lands for agricultural purposes. This indiscriminate burning caused loss of most Nitrogen, sulphur and carbon, elimination of seedlings to grow, destruction of humus as well as adverse effects on soil micro-fauna and destruction of micro-flora. All of the above have adverse effects on the environment and results to low productivity in agriculture.

Overgrazing: This is over exploitation of the grazing lands usually herdsmen and farmers; it triggers soil erosion, desertification and other process of environmental degradation. Productivity is diminished with a consequence on economy and the welfare of people. Fertility of land will also decline since its botanical composition has changed as more palatable and nutritious species are removed.

 

Control of Adverse Agricultural Practices on Environment

Deforestation can be controlled by an effective forest policy, afforestation programmes and tree planting campaigns. Policies should however be continues and sustainable. Soil erosion can be converted by counter ploughing, mixed and intercropping, establishment of vegetation cover, adoption of suitable land use measures and measures of early detection so as to deter its occurrence. Salinization can however be reversed by creating canals, to allow free passage of water and by appropriate agricultural practices. Bush burning can be converted first by the introduction of leguminous plants to help conserve soils nutrients by enhancing the process of nitrogen build-up in the soil, and secondly by promulgating a law to stop it. Lastly overgrazing can be controlled through collaborating on the local people and those involved limiting their action on frequent and heavy grazing of lands.

(Discuss other feasible measures of controlling the above problems in your local communities)

 

ENERGY INDUSTRIALIZATION AND ENVIRONMENT

Introduction

As society expands and become complex the need for various sources/types of energy to support both domestic and industrial activities also expands, industrialization is associated with the utilization of one form of energy or another, since it converts raw materials into finished goods. Extraction of mineral resources that yield energy is associated with environmental degradation this can be in the forms of health risks, acid leached into streams from mine operations as well as air pollution due to burning of fossils fuels. In most cases the environmental damage is not borne by the owner and hence not compensated as such is not part of the extraction decisions of the energy source.

In areas where minerals are extracted for energy purposes the environment changes and the change relates to the way and manner the energy sources are being extracted. The extraction of energy source may be in form of open cast, quarrying, or deep cast, in case of oil and natural gas, it is deep drilling.

 

Mining of mineral/energy resources cause considerable environmental changes as sometimes it is many kilometers deep and wide. It creates ponds and pits that accelerate erosion rates disrupt local drainage networks and since it cannot supports vegetation cover, then it paves way for desertification and desert encroachment especially when it happens in savannah regions.

 

Another environmental effect is that a lot of villages have to be relocated for the mining activity to take place and hence farmlands as well as other ecological assets will be lost forever. The relocation of people will however lead to migration to urban areas and increasing the urban population. The lost of sceneric value as well as recreational facilities. Sometimes collapse of rock and accidents occur and a lot of people lose their lives. The collapse can occur in working and abandoned mines.

A more disastrous effect of energy on the environment is seen from the pollution generated in the course if utilizing the energy source. It results to destruction of soil, aquatic and atmospheric quality. The use of fossil fuels is of most significantt here the inputs of these energy sources are being accelerated when they are used in industrial process. The mining of coal as well as radioactive elements for energy purposes have succeeded in polluting groundwater as well as damaging both the flora and fauna.

 

The use of fossil fuels began with industrial relocation, concerned was mainly on the increase in concentration of cloro-fluoro carbons and green house gasses which affects the climate. The deposition of the gasses is one of the most causes of aquatic and terrestrial acidification, it has also rendered water supply unportable. These gasses may also pose threat to human health which include lead pollution from automobiles and industrial process.   

Stored carbon from biomass and fossils is rapidly being transformed to atmosphere. Increasing concentration of CO₂ into atmosphere due to emission of unburned hydrocarbons could damage plants health and hence negatively affects productivity and can also lead to global warming.

 

The release of gasses into the atmosphere as a result of industrialization may also lead to acidification as precipitation because it is more acidic and hence lead to decline in fish stock and other water resources. Acid rains occur and it corrodes paints and destroys other structures the formation of acid rain can be demonstrated below:

So₂+H₂O→H₂SO₃ ↔H⁺+HSO₃

As sulphurous acid can be oxidized by various oxidants.

          _Oxidant

So₂         →       So₃ and can therefore form a weak sulphuric acid as below:

 

So₃+H₂O→H₂SO₄ ↔H⁺+HSO₄↔2H⁺+SO₄^2- . The same applies to form nitrogen acids.

Other environmental problems occur with the cracking and utilization of radioactive material/elements to speed of the energy requirement of industrial process. Two major environmental problems are

(i)                  Nuclear accidents and

(ii)                 Storage of radioactive wastes

In the course of energy production, radioactive elements releases waste to the environment inform of heat and toxic substances that damaged the environment, where these accidents do not occur, the management and storage of the waste is another problem as is not easy to end the nuclear cycle for example uranium onces used contain thorium 230 which decays with half life of 78, 000 years to a Radon 222. Also strontium-90 and cesium-137 decayed after approximately 1, 000 years as such once used today they affect not only the current generation but the succeeding ones.

 

Lastly industrialization is associated with the generation of toxic waste water as well as solids that harmfully affects lives and properties as well as other environmental assets. An example is the koko waste that was once deposited in the southern part if Nigeria.

Examine how do the following forms of energy damage the environment:

Hydroelectricity, Wind energy, Solar energy, Photovoltaic and Bio-fuel (ethanol generation). Is the synthesiss of bio-fuel economically feasible?